Parker Imports Ltd. is expected to pay a $2.00 dividend in one year. The required rate of

Question:

Parker Imports Ltd. is expected to pay a $2.00 dividend in one year. The required rate of return is 9 percent. The firm uses a dividend payout ratio of 25 percent. Calculate the leading P/E ratio in the following cases:

a. Expected growth rate = 4 percent

i. Today

ii. In one year (immediately after dividend paid)

b. Expected growth rate = 8 percent

i. Today

ii. In one year (immediately after dividend paid)

c. If a firm is expected to have a constant dividend growth rate, do you expect the P/E ratio to change over time? Explain.

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...